Wednesday, April 29, 2009
The Spin On -6% GDP
More sanity from David Rosenberg:
We have to keep an open mind and respect Mr. Market
There is an old adage that a market which does not respond bearishly to bearish news is clearly not a market in a bear phase. As financial economists, we have to keep an open mind and respect the verdict that is being turned in by Mr. Market as he continues to shrug off weak data and embrace whatever sprinkle of good news that can be gleaned from the incoming data releases.
Worst back-to-back GDP performance in 50 years
Indeed, the vast majority of economic data remain very soft even if treated by investors at this point as old news. Not only did 1Q real GDP contract sharply -- at a 6.1% annual rate versus consensus expectations of -4.6%, it followed on the heels of a 6.3% decline in the fourth quarter of 2008. That marks the worst back-to-back performance in 50 years.
A few reasons that the stock market is rallying on this news
1) The second derivative can only get better from here
The market believes that the back-to-back declines of 6%+ in real GDP is a cathartic event and that the 'second derivative' (i.e. change in the rate of growth) can only get better from here.
2) Investors like the knife companies took to inventories
Inventories were cut by $103.7B in 1Q and accounted for nearly half of the decline in real GDP last quarter. While demand was also soft, the view is that we entered the second quarter with an inventory/sales ratio that was quite a bit lower than many forecasts, including ours, and as such we should see a much 'less negative' 2Q print on real GDP. It is hard to argue with that point, and again, this is a market willing to trade off of 'second derivatives' in the economic data.
3) Government spending contraction, a one-off event
Government spending also contracted, mostly on defense, which subtracted 0.4 percentage points off of the headline GDP number. Again, a market that has been very selective in its interpretation of the data is viewing this drag as a one-off nonrecurring event.
4) Upside surprise to consumer spending
If there was an upside surprise in the data, it was consumer spending, which managed to post a 2.2% annualized advance. Many pundits are pointing to this as a sign of stabilization in the most critical segment of domestic demand. Then again, we know from the monthly retail sales data that the bulk of this first quarter growth took hold in January, which followed a record 30% annualized plunge as 2008 drew to a close.
We advise investors to view consumer rebound as a blip.
While most of the post-Lehman collapse in spending, output and credit supply is behind us, we would advise investors to view the consumer rebound in 1Q as 'noise' or a blip in what is still very likely going to be a secular (multi-year) downtrend. The process of liquidating debt and rebuilding depleted baby-boomer savings is barely one-third over (with a savings rate of barely more than 4% from 0.2% a year ago.).
Difficult to see recession ending anytime soon
So, we view the recovery in consumer spending that has the bulls rather excited as temporary and as we said, mostly reflecting a bounce in January. What we see in the data supporting the consumer in 1Q was a $193 billion (annualized) decline in tax payments by the household sector. Meanwhile, organic personal income (excl government benefits) contracted at a 5.9% annual rate (-$154 bln). In the absence of a recovery in wage and salary income, we think it will be very difficult to paint a picture of the recession coming to an end anytime soon.
Nominal GDP declines at a 3.5% annual rate
We must admit to being surprised at the bond market reaction as the yield on the 10-year note retests critical support around the 3% area, especially with NOMINAL GDP, which has the highest correlation with interest rates, in contraction phase. Nominal GDP declined at a 3.5% annual rate on top of a 5.8% slide in the fourth quarter of last year. This back-to-back slide dragged the year-on-year trend to -0.5% from +1.2% in 4Q and +4.7% a year ago.
As for equities, a client made a very key point to us this morning in the aftermath of the data. The left side of the V does not surprise anyone anymore -- it's a done deal. What investors will have to see for this market to reverse course is that the right side of the V will prove elusive and end up looking like an L, an elongated U or a series of W's.
We have to keep an open mind and respect Mr. Market
There is an old adage that a market which does not respond bearishly to bearish news is clearly not a market in a bear phase. As financial economists, we have to keep an open mind and respect the verdict that is being turned in by Mr. Market as he continues to shrug off weak data and embrace whatever sprinkle of good news that can be gleaned from the incoming data releases.
Worst back-to-back GDP performance in 50 years
Indeed, the vast majority of economic data remain very soft even if treated by investors at this point as old news. Not only did 1Q real GDP contract sharply -- at a 6.1% annual rate versus consensus expectations of -4.6%, it followed on the heels of a 6.3% decline in the fourth quarter of 2008. That marks the worst back-to-back performance in 50 years.
A few reasons that the stock market is rallying on this news
1) The second derivative can only get better from here
The market believes that the back-to-back declines of 6%+ in real GDP is a cathartic event and that the 'second derivative' (i.e. change in the rate of growth) can only get better from here.
2) Investors like the knife companies took to inventories
Inventories were cut by $103.7B in 1Q and accounted for nearly half of the decline in real GDP last quarter. While demand was also soft, the view is that we entered the second quarter with an inventory/sales ratio that was quite a bit lower than many forecasts, including ours, and as such we should see a much 'less negative' 2Q print on real GDP. It is hard to argue with that point, and again, this is a market willing to trade off of 'second derivatives' in the economic data.
3) Government spending contraction, a one-off event
Government spending also contracted, mostly on defense, which subtracted 0.4 percentage points off of the headline GDP number. Again, a market that has been very selective in its interpretation of the data is viewing this drag as a one-off nonrecurring event.
4) Upside surprise to consumer spending
If there was an upside surprise in the data, it was consumer spending, which managed to post a 2.2% annualized advance. Many pundits are pointing to this as a sign of stabilization in the most critical segment of domestic demand. Then again, we know from the monthly retail sales data that the bulk of this first quarter growth took hold in January, which followed a record 30% annualized plunge as 2008 drew to a close.
We advise investors to view consumer rebound as a blip.
While most of the post-Lehman collapse in spending, output and credit supply is behind us, we would advise investors to view the consumer rebound in 1Q as 'noise' or a blip in what is still very likely going to be a secular (multi-year) downtrend. The process of liquidating debt and rebuilding depleted baby-boomer savings is barely one-third over (with a savings rate of barely more than 4% from 0.2% a year ago.).
Difficult to see recession ending anytime soon
So, we view the recovery in consumer spending that has the bulls rather excited as temporary and as we said, mostly reflecting a bounce in January. What we see in the data supporting the consumer in 1Q was a $193 billion (annualized) decline in tax payments by the household sector. Meanwhile, organic personal income (excl government benefits) contracted at a 5.9% annual rate (-$154 bln). In the absence of a recovery in wage and salary income, we think it will be very difficult to paint a picture of the recession coming to an end anytime soon.
Nominal GDP declines at a 3.5% annual rate
We must admit to being surprised at the bond market reaction as the yield on the 10-year note retests critical support around the 3% area, especially with NOMINAL GDP, which has the highest correlation with interest rates, in contraction phase. Nominal GDP declined at a 3.5% annual rate on top of a 5.8% slide in the fourth quarter of last year. This back-to-back slide dragged the year-on-year trend to -0.5% from +1.2% in 4Q and +4.7% a year ago.
As for equities, a client made a very key point to us this morning in the aftermath of the data. The left side of the V does not surprise anyone anymore -- it's a done deal. What investors will have to see for this market to reverse course is that the right side of the V will prove elusive and end up looking like an L, an elongated U or a series of W's.
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